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Butter your investment with ‘Manorama’

Manorama Industries Ltd (MIL) is the sole manufacturer of several value-added tailor-made products that form the ingredients (Shea oil, Sal oil, Mango Fats, Kokum butter & Mowrah fat) of Cocoa Butter Equivalents (CBE). CBE is a cheaper alternative to Cocoa Butter (CB), which improves the taste, solidity and texture of the chocolate. MIL is one amongst the seven producers of CBE globally.

The current capacities of 15,000 MTPA are being expanded to nearly 40,000 MTPA, keeping in mind the burgeoning demand for CBE and its value-added products from the food and cosmetic industry. In fact, the demand is so large that even the expanded capacities of MIL are insufficient to meet the requirements of even one of the largest food companies like Mondelez.

We expect revenues to grow to INR 549 cr (38.1% CAGR) by FY24 driven by the commencement of the new capacities of 25,000 MTPA (by Q1FY23). EBITDA and net earnings are expected to grow at a CAGR of 44.0% (to INR 106 cr) and 50% (to INR 62 cr), respectively over the forecast period. EBITDA and net margins are expected to grow to 19.4% (+228bps) and 11.3% (+247bps), respectively by FY24. Consequently, return ratios, RoE and RoIC, are expected to improve to 16.3% (+369bps) and 20.1% (+1,864bps), respectively by FY24.

We initiate coverage with a BUY for a price target of INR 2,074 (40X FY24 earnings) representing a potential upside of 39% from the CMP of INR 1,492 over the next 24 months. MIL’s waste to revenue business model ensures a high ESG score which is a precursor for a re-rating of its valuation multiple. This remains an upside risk to our estimates.

Investment Rationale

* Significant scope for business growth – FSSAI has allowed the use of 5% CBE in chocolates from January 2018 (from the earlier limit of 2.5%). This should lead to an increase in the consumption of CBE from 8,000 MTPA in 2018 to more than 20,000 MTPA by 2022. In developed markets the permissible limit is 10% and if the same is allowed in India, it will open up significant scope for growth to MIL.

* Raw material availability is plentiful – MIL sources Saal and Mango seeds from tribals of the nearby forest, while importing Shea seeds from western African countries. Availability of Saal and Mango seed is abundant in the Chhattisgarh Forest area and currently the company sources only 5% of the available supply. The abundant availability of raw material and scope for expansion citing the demand potential should enable MIL to plan future capacity expansion.

* Strong client base – MIL has a strong clientele with the world’s leading confectionery & cosmetic brands, like Ferrero, Mondelez, The Body Shop, L’Oréal, Unigra, Mitsui, Walter Rau, etc., sourcing its products.

* Waste to revenue business model leads to high ESG score – De-oiled cakes and gums are the by-products in the manufacturing of CBE. MIL sells de-oiled cakes as cattle feed, while supplying gums to cosmetic companies as an ingredient for skincare products. MIL converts forest waste (Shea & Saal seeds & Mango kernel) into CBE and also utilizes by-products, which reduces its waste discharge. This provides MIL with the high ESG score and should lead to a substantial re-rating of its valuation multiple.

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